Term vs. Universal Life Insurance – Life insurance Is an important part of our financial plan. It provides financial help to your family in case you pass away during the policy. It gives you peace of mind that if you die unexpectedly, your family will be taken care of. While life insurance is very important for everyone, it can also be complex due to the variety of options available. However, the most common ones are whole life, term life, and universal life insurance.
In this article, we will mainly focus on the difference between term and universal life. Term vs. Universal Life, there are two options to consider when shopping around for life insurance. Each of them offers unique benefits and features to consumers. Follow to the very end to know the differences between these two options and which option suits your needs the best.
How Term Life Insurance Works
This policy provides temporary financial protection for a specific time. You pick how much coverage and how long you want it. If you die during that time, your chosen beneficiaries get the policy’s payout, which is usually tax-free. People often get term life to replace lost income for their family. But it can also help cover education costs for dependents or pay off any debts you leave behind.
Common Types of Term Policies
- Level Term: The policy offers the beneficiary the same death benefit no matter when your death happens during the term. The premium will also stay the same.
- Decreasing term: This policy death benefit decreases steadily over the term length, typically in line with debts or home loans. Also, premiums decrease just as death benefits
- Convertible term: the policy allows consumers to change to permanent coverage without going through a medical examination or health questions.
How Does Universal Life Work?
This policy covers you for your whole life and is more flexible than other permanent policies. You pick how much coverage you want and when it ends, usually at age 90 or older. When you die, your loved ones get the payout.
Unlike term life, universal life has a cash value. This lets you save or invest money within the policy, which you can access while you’re alive. Some people choose a universal life to leave an inheritance or cover final expenses for their family. Others use it to work toward long-term financial goals.
Common types of Universal Life policies
- Indexed Universal Life is a policy that allows you to adjust your premium and death benefit. The cash value account is linked to a stock market index.
- Guaranteed Universal Life: This policy offers you a fixed premium and a guaranteed death benefit. It helps to build up minimal cash value.
- Variable Universal Life: A policy that allows policyholders to invest their cash value in the market via sub-accounts. Just so you know, the premiums are adjustable.
Term vs. Universal Life Insurance Coverage Length
Term life insurance is temporary, lasting for a fixed period, usually between 10 and 30 years. Universal life insurance, on the other hand, covers you for your whole life.
The length of coverage is crucial because beneficiaries only get the payout while the policy is active. Whether it’s from term life or universal life, beneficiaries usually don’t owe taxes on the payout they receive.
Cost
The big difference between term and universal life insurance is the cost. Term life insurance is cheaper since it covers you for a fixed number of years and doesn’t build cash value. On the other hand, universal life insurance costs more because it offers lifelong coverage and has a cash value component.
Costs can vary depending on factors like age and health. For instance, a healthy 50-year-old man might pay between $480 and $840 per year for a 20-year, $250,000 term life policy. Meanwhile, a universal life policy with the same coverage could cost between $2,550 and $4,750 per year.
Premium stability
In a universal life insurance plan, premiums can change since part of what you pay goes into investments, which can fluctuate. On the other hand, term life insurance has steady premiums that remain the same for the whole policy duration once you sign up. This predictability makes long-term insurance a reliable choice for Canadians. Plus, the younger you are, the cheaper your life insurance will likely be.